UK: Criminalising Cartels – The New Rules

Summary and Implications

The Enterprise and Regulatory Reform Act 2013 makes significant
changes to the criminal cartel offence, coming into force on 1
April 2014. This is intended to make it easier in future for the
Competition and Markets Authority (CMA) to bring successful
prosecutions against company executives for anti-competitive
conduct.

From 1 April 2014 the functions of the OFT and the Competition
Commission will be transferred to the CMA.

The consequence of these amendments is that company directors
and other employees will need to exercise even greater caution to
protect their own personal position when entering into co-operative
arrangements with competitors which might fall within the scope of
the cartel offence. The removal of the "dishonesty" test
means that they will have to take active steps to avoid personal
criminal liability.

Cartel offence

Under section 188 of the Enterprise Act 2002 (as amended by
the new Act), the cartel offence applies where individuals enter
into "hardcore" anti-competitive agreements aimed at:

price fixing;

limiting the supply/production of goods or services;

market sharing; and

bid-rigging.

It covers agreements between competitors, and runs alongside the
normal civil provisions of UK and EU competition law applying to
companies. The maximum penalty under the cartel offence is five
years' imprisonment and/or unlimited fines.

Dishonesty

The most significant and controversial change under the new Act
is that there will no longer be any requirement to show that
individuals acted "dishonestly" in entering into
these agreements. The need to prove that the defendant's
behaviour is "dishonest" was regarded as a major hurdle
in bringing criminal proceedings. There has previously been
only one successful prosecution in the UK, in the marine hose
cartel case. The OFT previously suffered a major set back in 2010
following the collapse of its prosecution against four BA
executives in the airline passenger fuel surcharge case.

The removal of the "dishonesty" requirement has raised
concerns that the cartel offence could in principle apply to a
broader range of legitimate business transactions between
competitors, including:

merger transactions where there are reciprocal non-compete
covenants on the vendor and the purchaser; and

production/supply JVs which include non-compete covenants on
the JV parties.

In future, these types of transactions will require careful
assessment, not only under the general provisions of UK and EU
competition law, but also with specific reference to the cartel
offence.

The CMA has prepared draft Guidelines (Prosecution Guidance) on
the cartel offence, which are due to be adopted shortly.

Exclusions

The new Act aims to mitigate these concerns by introducing a
number of exclusions.

The cartel offence will not apply where:

customers are notified of the arrangements before entering into
any supply agreements (the notification exclusion). This, however,
requires something more than a broad, general disclaimer to
customers;

in the case of bid-rigging, the customer inviting tenders is
informed of the arrangements by the time the bid is submitted;
and

details of the arrangements are publicised in the specified
manner before they are implemented (the publication exclusion). The
Government intends to draw up secondary legislation providing for
publication of agreements in the London Gazette, Edinburgh Gazette
and Belfast Gazette.

Company executives will therefore need to consider carefully the
need to publicise business transactions which involve co-operative
arrangements with competitors, utilising one of these exclusions,
in order to protect themselves from possible prosecution.

Defences

There are also three new defences to any prosecution where the
individual can show that:

he or she did not intend that the arrangements would be
concealed from customers before entering into supply agreements
with them;

he or she did not intend that the arrangements should be
concealed from the CMA; and

prior to entering into the arrangements, he or she took
reasonable steps to take legal advice.

As stated above, the prosecution will not have to establish
"dishonesty", and the burden of proof will be on the
employee to establish that he or she acted openly and that there
was no intention to conceal the agreement. It will also be
important for company executives to ensure that the company takes
legal advice from either in-house or external lawyers. Curiously,
there does not appear to be any requirement that the individual
acts in accordance with any legal advice which the company receives
or that the advice is favourable. It remains to be seen, however,
how the CMA will interpret the scope of these defences.

Conclusion

These amendments may well mean that more business
transactions involving industry competitors, such as co-operative
JVs, will in future need to be disclosed, to take advantage of the
notification/publication exclusions. There will also be a stronger
incentive for employees to check that the company takes specialist
legal advice before entering into any agreements with competitors.
The changes are likely to create even greater scope for conflicts
of interest between a company and individual executives, as well as
a greater risk of whistle-blowing by employees.

The OFT has recently announced that criminal charges have been
brought against an executive, Peter Snee, for his involvement in a
suspected cartel in the supply of galvanized steel tanks for water
storage. Although the case is being brought under the existing
cartel offence, it is a sign that criminal investigations are
likely to increase in future as part of a tougher enforcement
regime.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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